On Zimbabwe’s Gold-plated Decision

By Adedolapo Grillo

On the 8th of May, 2023, Zimbabwe made a purposeful attempt at securing her economy and cementing a place in the global digital financial structure. The Reserve Bank of Zimbabwe (RBZ) introduced an asset-backed token in the country; a token backed by gold. Asset-backed tokens are tokens that are tied to physical assets like gold, real estate, and oil. These digital assets derive their value from the worth of their corresponding physical assets. This introduction is riding on a wave of a huge economic downturn in the country.

For over two decades, the Zimbabwean dollar has seen a massive decline in value. Currently, the worth of 1000 Zimbabwean dollars is approximately 1 US dollar. The bad form of the Zimbabwean currency is a representation of the economic decline with which the country has been grappling. Consequently, the country released the Mosi—a—Tunya, which are physical gold coins, in 2022. These gold coins helped to stem the tide of month to month inflation, reducing it from over 30% to 1% in 6 months as of January 2023. However, the country still has one of the highest inflation rates in the world at 230%.

The newly introduced digital tokens will complement the Mosi—a—Tunya, to further stabilise the currency and economy. RBZ stated that the newly introduced gold-backed token will expand and preserve the instruments of financial stability within the country. The bank also believes this move will also broaden the access to the country's finances by members of the public.

The gold-backed digital asset offers individuals an alternative investment to preserve their savings and attract investors to Zimbabwe's cryptocurrency market, boosting revenue and driving economic growth.

This move also empowers citizens by providing financial freedom and encouraging domestic investments, investing in the country's human capital.

What is the Implementation Process?

In the initial phase, gold-backed tokens will be issued for investment, with a 180-day vesting period. Tokens can be purchased in fractions for $10 by individuals and a minimum of $5000 by institutional investors. Banks will create specialised accounts to hold the asset, allowing for easy exchange between digital tokens and physical gold coins.

In the second phase, the tokens will be held in e-gold wallets or cards, enabling trade and person-to-person/business transactions. The local pricing of the tokens will be determined by international gold prices. The cost of the coin is expected to be reasonably affordable. Payment in Zimbabwean dollars will remain at a 20% margin above the willing-buyer willing-seller interbank mid-rate.

Is Zimbabwe Ready for a Gig Economy?

If this move proves successful, it might be one of the greatest financial surprises in the last decade. When one considers the circumstances of the country, it becomes difficult to see the success of this strategy. A similar move was attempted by the Central African Republic (CAR) recently, but has failed to gain traction. CAR's experience serves as a cautionary tale for Zimbabwe, highlighting the potential obstacles and risks involved in implementing such a system.

With a current mobile phone and internet penetration rate of 61.3%, approximately 38.7% of the population in Zimbabwe lacks access to and the ability to use the digital token. The country aims to increase this number to 75% by 2025, but challenges such as limited broadband network extension and frequent power outages hinder internet accessibility. These factors raise questions about how the government will engage and encourage the population to adopt and utilise the token without sufficient internet access.

We must also consider the readiness of the banks to sell these tokens. Many banks within the country are clueless about the next step they have to take concerning the gold token. Most of them are not ready to sell, and are still waiting on the directives from the RBZ. Even from the start, there seems to be a mismanagement of the process which casts aspersions on whether the gold-backed token move will be a success in Zimbabwe.

Also, there is a significant level of scepticism and mistrust among the population towards the government's ability to stabilise and manage the economy. The country has faced severe economic challenges over the past decade, including hyperinflation, currency devaluation, and a lack of fiscal discipline. These factors have eroded public confidence in the government's economic policies and institutions.

The impact of this lack of trust on the adoption rate of the asset-backed token will be significant. People may be hesitant to embrace this new digital asset, fearing that it could be mismanaged or subject to government interference. The experiences of the past decade may lead to a general wariness and cautious approach towards any new initiatives introduced by the government.

Introducing asset-backed tokens in such a context carries risks, unlike in more stable economies where these risks can be better mitigated. Investors may encounter losses due to low liquidity assets and market volatility, while concerns about Zimbabwe's ability to prevent hacking and cyber-crimes add to the apprehension. The vulnerability of tokenization platforms to theft and cyber attacks further contributes to the perception of the token as unsafe without robust security measures in place.

The regulatory policies on the token and the role of financial institutions are also crucial considerations. What are the security regulations on the tokens? What is the role of financial institutions with respect to the token? Are they to act only as advisors or will they be allowed to leverage their expertise as custodians of the token? The country’s leadership has remained mum on providing answers to these questions. 

We cannot answer whether the introduction of this gold-backed token will open up Zimbabwe to fully embrace cryptocurrencies. What we do know is that Zimbabwe’s decision may be a beacon that could encourage other countries to open up to crypto, especially if the decision proves to be positively fruitful. Overall, while the introduction of an asset-backed token in Zimbabwe is an innovative step towards economic stability, building trust, transparency, and regulatory clarity will be crucial in gaining public confidence and overcoming the scepticism that arises from the economic turmoil of the past decade.